5-Hydroxymethylcytosine (5hmC) was recently described as a stable modification in mammalian DNA. 5hmC is formed by the enzymatic oxidation of 5-methylcytosine (5meC). Overwhelming evidence supports the notion that 5meC has a negative effect on transcription; however, only recently has the effect that 5hmC has on transcription begun to be studied. Using model substrates including the CMV(IE) promoter and a generic gene body we have directly assessed the effect that 5hmC, both at the promoter and in the gene body, has on in vitro gene transcription. We show that the presence of the 5hmC modifications strongly represses transcription. We also demonstrate that the inhibition of transcriptional activity is primarily due to the presence of 5hmC in the promoter and that 5hmC in the gene body has a minimal effect on transcription. Thus, we propose that the presence of 5hmC in promoter prevents the binding of essential transcription factors or recruits factors that repress transcription.